Refiners in the U.S. are expected to have little difficulty meeting U.S. gasoline demand during the 1992 summer driving sea-son.
Consequently, barring unexpected distribution bottlenecks caused by new air quality specifications for gasoline, summertime wholesale and retail gasoline prices are expected to stay within seasonal norms.
The apparent fitful recovery of the U.S. economy would suggest a near term turnaround in gasoline demand after 3 consecutive years of decline. But most analysts expect economic recovery this year to be weak, thus crimping demand growth.
U.S. summer gasoline supplies are expected to be adequate mainly because gasoline stocks are holding steady at volumes above last year's averages and there still is room to increase operating rates. The Energy Information Administration expects gasoline stocks at summer's end to be higher than at the end of summer 1991.
Refiners and traders are adapting effectively to changing gasoline markets, say industry analysts. They contend industry apparently has learned to take advantage of new pricing patterns on U.S. gasoline spot markets.
At the same time, several years of experience in coping with the logistics of changing gasoline formulas across a broad swath of the country for part of the year-seasonal volatility limits-have taught U.S. refiners how to avoid significant spot supply dislocations.
The upshot is that in an oil market without extreme gyrations this driving season, U.S. refiners should be able to readily meet motorists' needs and continue to enjoy the comfortable margins they have thus far in 1992.
AIR TRAVEL WILD CARD
One wild card on the demand side is the developing boom in U.S. air travel sparked by U.S. air carriers' fare wars.
Because the airlines' new rate structures were unveiled only in recent weeks, it was too early at presstime for analysts to gauge the effect of the explosion in air travel on expected driving patterns.
The trend could prove significant because of its unprecedented scope. With such fares as a $200 Los Angeles-New York roundtrip being offered, demand for air travel in the U.S. has reached a frenzied pace.
Associated Press last week reported American Airlines logged more than 250,000 completed calls May 28 and United Airlines reported as many as 12,000 calls/hr. AT&T said the fare war resulted in a record number of long distance telephone calls for 1 day, 159.6 million, also on May 28, AP reported.
Whether the growth in air travel represents a change of plans from driving trips-and thus will soften gasoline demand this summer-remains to be seen.
LOWER SUMMERTIME RVP
Aside from the air fare war, revised Environmental Protection Agency summertime gasoline volatility standards are the most significant new factor capable of affecting U.S. summer gasoline supplies and prices.
Distributors supplying retailers in EPA ozone nonattainment areas by May 1 were to begin shipping gasoline with maximum Reid vapor pressure (Rvp) of 7.8 psi. Retail outlets are required to meet regional gasoline Rvp requirements June 1-Sept. 15. Regional wintertime Rvp limits in effect the rest of the year are 13.5-15 psi.
Analysts say some refiners by Mar. 1 had begun blending gasoline that met summertime volatility requirements.
States with EPA ozone nonattainment areas account for 52% of U.S. gasoline sales. But analysts say lower Rvp requirements this summer won't affect the supply or price of unleaded regular gasoline very much.
A refinery model developed by Pace Consultants Inc., Houston, indicates the cost of lowering gasoline Rvp to 7.8 psi from 9 psi at a typical refinery on the U.S. Gulf Coast would be less than 1/gal. However, on the West Coast the relative cost of manufacturing premium unleaded gasoline with a maximum Rvp of 7.8 psi could increase later this summer because of higher costs of low Rvp, high octane blending components.
Analysts say U.S. gasoline prices could begin a long term upward trend late this year as refiners begin factoring in costs of manufacturing and handling gasoline meeting federal requirements for oxygen content effective Nov. 1, 1992. Under the 1990 Clean Air Act amendments (CAAA), gasoline sold in 39 carbon monoxide nonattainment areas after Nov. 1 must contain at least 2.7 wt % oxygen.
EARLY PRICE PEAK
Ken Miller, a principal at Purvin & Gertz Inc. (PGI), Houston, says U.S. gasoline spot prices have started increasing early in the second quarter each year since EPA began lowering summertime Rvp standards in 1989.
"By the time we get to the high demand season for gasoline, we've already had a price spike, gasoline and crude oil inventories have been taken care of, and we've usually ended up seeing a pricing downturn," Miller said.
Charles L. McSpadden, president of Bonner & Moore Market Consultants (BMMC), Houston, agrees that U.S. gasoline prices are peaking well before peak summertime retail demand. However, he says that is at least partly because refiners are locking in wholesale prices early by selling gasoline through futures contracts.
"It doesn't necessarily reduce peak prices," McSpadden says. "It merely advances peak prices ahead of the season."
McSpadden says gasoline spot prices on the U.S. Gulf Coast will peak at more than 67/gal in June and July before declining in August to about 66.5/gal and to 62.5/gal in September.
Miller says Gulf Coast spot prices are likely to decline from a peak of about 64/gal in late May to about 62/gal in June and 61/gal in July.
"That's presuming a policy shift by OPEC doesn't cause crude markets to tighten," Miller says.
Sustained higher crude prices would mean higher gasoline spot prices, he says.
ADJUSTING TO MARKETS
McSpadden and Miller agree that U.S. refiners are adjusting well to evolving U.S. gasoline markets.
"This year, in anticipation of a second quarter price spike like those we've had in the second quarters of the past 2 years, some traders and refiners brought in lower Rvp gasoline from Europe and stored it in the Northeast," Miller says.
The net volume of gasoline imported was not substantial. But Miller says the second quarter pricing spike didn't occur to the degree it might have if supplies had not been imported.
McSpadden says U.S. spot gasoline prices also might be peaking earlier because refiners are smarter about planning, consumers are more sensitive to price, or a number of other factors.
"But futures market activity seems to be the big factor shifting seasonal pricing patterns," he says.
By selling some gasoline through futures contracts, refiners are able to lock in prices prior to the nominal peak of the gasoline season, McSpadden says. "It's classic arbitrage. It does not necessarily reduce the magnitude of the pricing peak, but it advances the peak and takes some of shine off the physical market," he says. "We saw in April, for instance, unleaded futures prices started going up and refiners took advantage of that and locked in their positions.
"Once they have a position locked in, their aggressiveness tends to dissipate."
GASOLINE DEMAND
Expectations of U.S. gasoline demand this summer are in line with historical levels.
EIA projects summer 1992 gasoline demand to average 7.46 million b/d, down slightly from a year ago. The agency defines summer driving season as May-August.
According to OGJ's U.S. industry scoreboard, gasoline demand in the 4 weeks ending May 15, 1992, averaged 7.5 million b/d, a 2.3% increase from a year ago (OGJ, May 25, Newsletter).
Pace Pres. Richard Stellman says U.S. summer 1992 gasoline consumption might increase slightly.
"But we feel there still will be adequate supplies for gasoline consumers," Stellman says.
PGI's Miller points to early signs of increased demand.
"We are seeing increases of 3.5-4% in the mileage motorists are driving, indicating that consumers are responding to the bottoming out of the economy," Miller says.
He says travel likely will continue increasing through summer driving season "because the economy is going to be improving, too."
The U.S. Travel Data Center (Ustdc) and American Automobile Association (AAA) say U.S. summertime travel will rebound from last year's decline.
Ustdc forecasts that summer vacation travel will be up 4% as American motorists take 326 million person-trips. Ustdc defines a person-trip as one person traveling 100 miles or more away from home.
Automotive vacation travel will account for 268 million person-trips, 11 million person-trips more than in 1991 and equal to the record set in 1990.
A survey of AAA clubs serving more than half the association's 33 million members shows summer vacation planning is up 7% from 1991.
However, EIA says increases in the number of U.S. vehicles and vehicle miles driven are expected to be offset by improved vehicle fuel efficiency.
U.S. gasoline demand has declined the past 3 years, notably by 1.3% in 1990 and 0.7% in 1991. EIA attributes most of the decline to continuing improvements in auto fuel efficiency and stagnant U.S. economic activity.
CHANGING DEMAND PATTERNS
EIA says many factors influencing U.S. gasoline requirements have changed significantly since the early 1970s. In 1990:
- The number of private U.S. passenger vehicles increased to 145 million from 89 million in 1970.
- Average gasoline consumption per vehicle decreased to 505 gal from 771 gal in 1973.
- Average distance driven per vehicle increased to 10,556 miles from 9,141 miles in 1980.
- Vehicle fuel efficiency improved to 20.9 mpg from 13.5 mpg in 1970.
Fuel efficiency likely will continue improving as older vehicles are replaced with newer, more fuel efficient models. The Federal Highway Administration reports 1991 model vehicles averaged 28.2 mpg, compared with 14.2 mpg among 1974 models.
Miller expects yearlong 1992 U.S. gasoline demand to average about 1.5% more than last year-excluding "underlying growth rates"-primarily because of extremely low demand in prior years.
Gasoline demand in first quarter 1992 increased by 2.6% from the same period in 1991, mostly because demand a year ago fell by 3.3% because of war in the Middle fast, he says.
"We'll see some higher demand increases in the next 1-2 years just because we're coming out of this recession," Miller says. "Then demand will begin to taper off, and by 1994 we'll see underlying long term growth rates of less than 0.5%."
ECONOMIC GROWTH
EIA says U.S. economic growth will be weak this year, with gross domestic product increasing by about 1.8%. It expects modest economic recovery to boost 1992 gasoline demand about 0.6% from 1991's level.
EIA says U.S. economic growth is being restrained by low levels of residential and commercial construction, high consumer debt and depressed consumer confidence, state and federal governmental budget cuts, and weakness in the domestic banking industry.
Greater economic activity could increase gasoline consumption slightly beyond expectations. However, U.S. refineries are operating at less than 90% of capacity, and crude supplies are adequate for refiners to increase gasoline supply enough to serve whatever demand develops, EIA and other analysts says.
Miller says U.S. refineries have been producing enough gasoline to maintain stocks well within historically adequate ranges. With refinery operating rates starting to move up to "typical summertime output levels," he said, there always is a chance refiners might produce too much gasoline.
"Just the fact that prices are high and margins are good will induce refiners to run more crude," Miller says.
McSpadden says increasing throughput to increase sales during times of high refining margins is a normal reaction in a highly competitive market.
"Refiners know they have to take advantage of good market conditions," he says. "High refining margins will not last forever because all their competitors are going to crank up throughput."
McSpadden says the industry-wide response of increasing throughput during times of high operating margins tends to degrade the margins in short order and within a few months margins have been reduced.
GASOLINE PRICE OUTLOOK
McSpadden says the unexpected crude oil price spike in late May-after members of the Organization of Oil Exporting Countries rolled over existing production quotas-will be short-lived and won't change BMMC's gasoline price outlook (OGJ, June 1, Newsletter).
"I had the impression that our forecast might have been a little too bullish for June," he says. "Now that crude oil prices have bobbed up that probably will impart a little momentum into June, and I've already seen it in gasoline spot prices. They went up by nearly 3/gal yesterday in the physical market."
Despite the oil price increase, McSpadden said, "The price of West Texas intermediate will fall out at about $21/bbl." BMMC earlier forecast WTI would average $20.10/bbl this month.
"I am not persuaded to change my crude oil outlook," McSpadden says. "Therefore, I'm not going to change my gasoline outlook significantly."
Miller says U.S. oil markets overreacted to news of OPEC's new production levels.
"The changes didn't represent a permanent policy shift," he said.
In addition, Miller says, oil price volatility often isn't reflected in wholesale gasoline prices. Similarly, prices on gasoline spot markets can move up and down without causing price changes at the wholesale level.
Since wholesale prices react less rapidly than spot market prices and retail prices react less rapidly than wholesale prices, "You have to have a fairly substantial, lasting crude oil price movement before it is translated all the way down to the pump," he said.
According to EIA estimates, retail prices this summer for all grades of motor gasolines will average $1.181.22/gal. In 1991, U.S. summer gasoline prices averaged $1.19/gal.
EIA said U.S. retail gasoline prices in 1991 averaged $1.20/gal, down by 1.7% from average 1990 prices.
Retail prices at the beginning of 1991 were high because of war in the Middle East. However, following the end of that conflict, gasoline prices fell along with crude oil prices and continued drifting down because of weak demand resulting from a sluggish economy, EIA says.
GASOLINE STOCKS, DEMAND
U.S. gasoline stocks are within historical ranges and running ahead of year ago levels.
According to OGJ's U.S. industry scoreboard, U.S. motor gasoline stocks averaged 216.6 million bbl the week ended May 22, up 3.2% from the same week a year earlier (OGJ, June 1, Newsletter).
On Apr. 30, 1992, gasoline stocks were within the average seasonal range and about 14 million bbl above the minimum operating inventory (MOI) as estimated by the National Petroleum Council. According to a 1988 NPC study, gasoline shortages and operating problems would begin to occur if U.S. gasoline stocks fall below 205 million bbl.
EIA attributes the current level of gasoline stocks to sluggish demand and winter Rvp requirements.
Through the first 4 months of 1992, U.S. gasoline demand averaged 7.1 million b/d, about 100,000 b/d above average demand during the same periods of the previous 3 years.
U.S. gasoline production in the first 4 months of the year averaged 6.9 million b/d, and imports accounted for the other 200,000 b/d of supply. During the same period in the preceding 3 years, U.S. gasoline output averaged 6.7 million b/d and imports about 200,000 b/d, EIA said.
Gasoline stocks in spring 1991 were barely above the 205 million bbl MOI and fell to 198.5 million bbl during the week ended Nov. 15, 1991.
Despite low stock levels, EIA says no supply problems were reported at that time, suggesting that NPC's MOI is a more useful indicator of the effect of gasoline stock levels in the high demand months of spring and summer.
Unleaded regular gasoline in 1991 increased market share to 68.3% from 65.5% in 1990, EIA said. At the same time, the market share of unleaded premium gasoline decreased to 18.4% from 20.2% in 1990 and 23.5% in 1989. Unleaded midgrade gasoline in 1991 increased market share to more than 10%, while sales of leaded regular gasoline accounted for about 3% of U.S. motor gasoline sales.
RVP LIMITS AFFECT OPERATIONS
S. Craig Whitley, vice-president of BMMC, says a survey of more than 60 U.S. refineries found that refiners try to blend as few grades of gasoline as possible to serve their markets.
Pace's Stellman noted fewer gasoline grades would help interstate products pipelines simplify the logistics of segregating shipments with varied specifications.
Depending on variables such as storage capacity or distribution network used, some refiners serving predominantly 9.0 psi Rvp markets might blend only gasoline with Rvp of 7.8 psi or less, Whitley says.
To assure wholesale distributors receive gasoline with Rvp of 7.8 psi or less, Whitley says most product pipelines are requiring refiners to deliver gasoline into their pipeline systems with Rvp as low as 7.5 psi. To assure they can meet product pipelines' gasoline Rvp maximums, some refiners are blending gasoline with Rvp as low as 7.2 psi.
As a result, Whitley says more than 52% of gasoline being blended for sale in the U.S. likely has Rvp well below EPA's 7.8 psi ceiling for ozone nonattainment areas.
In California, for example, 92% of gasoline is sold in areas where Rvp is limited to 7.8 psi or less. So it is likely all refiners serving markets on the U.S. West Coast are blending gasoline to meet the 7.8 psi standard, including volumes refined or sold outside ozone nonattainment areas.
EPA southern nonattainment areas include all or portions of Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Louisiana, Maryland, Mississippi, New Mexico, North Carolina, South Carolina, Texas, Virginia, and Washington, D.C.
In 1995, EPA will reduce regional gasoline summertime Rvp to 7.2 psi and 9.0 psi. Even lower volatility standards will be implemented after 1997.
RVP PRICING EFFECT
In addition to the low incremental cost of blending low Rvp gasoline, Stellman says another reason summertime Rvp standards won't much affect gasoline prices is because refiners have found ways of dealing with excessive normal butane supplies.
A refiner can control Rvp by taking n-butane out of his gasoline pool. Two years ago, some refiners had to slow down process units because of surplus butane, Stellman says.
"Now they understand the effect of Rvp requirements and by and large have the necessary adjustments under control," he said.
For example, U.S. n-butane stocks in March 1992 increased 5.6 million bbl as refiners began eliminating butane from gasoline pools, Whitley says.
Stellman says premium unleaded gasoline prices later this summer could increase disproportionately on the West Coast, if low Rvp, high octane blending component supplies tighten.
To model the effect on gasoline prices of lowering Rvp, Pace created a hypothetical 200,000 b/d Gulf Coast refinery blending about 92,000 b/d of unleaded regular.
Pace's hypothetical plant lowered gasoline Rvp by withholding about 1,000 b/d of n-butane from the gasoline pool. The plant's operator then replaced butane with light raffinate or low octane naphtha and raised severity on the plant's reformer to maintain octane, Stellman says.
Pace's calculated cost differential between 9.0 psi and 7.8 psi gasoline-0.7/gal-balanced profits of selling butane into chemical feedstock markets against costs of increasing octane of replacement blending stocks.
Refiners on Gulf and West coasts reduce gasoline Rvp in similar ways. But on the West Coast, limited supplies or the cost of increasing reformer severity could boost prices of low Rvp blending components.
Stellman says costs of blending components are not expected to increase appreciably on the Gulf Coast because refiners there have enough flexibility to minimize processing changes.
OXYGENATED GASOLINE
Overall U.S. gasoline prices could increase after,the summer driving season as U.S. refiners begin factoring in costs of manufacturing and handling gasoline meeting federal requirements for oxygenate content effective Nov. 1, 1992. Under CAAA, gasoline sold in 39 carbon monoxide nonattainment areas after Nov. 1 must contain at least 2.7 wt % oxygen.
CAAA oxygenate requirements taking effect Nov. 1 likely will cause new storage and transportation logistics and scheduling problems.
EIA estimates U.S. refiners will have to store 17-29 million bbl of methyl tertiary butyl ether to meet CAAA oxygenate requirements for gasoline effective Nov. 1.
Potential problems for refiners are compounded by costs of meeting clean fuel regulations and the sale or closing of a number of plants, EIA says. The total U.S. refiners' capital investment needed to meet CAAA oxygenate requirements through 1995 has been estimated at more than $20 billion. Petroleum Industry Research Foundation Inc., New York, says U.S. refiners in this decade could spend as much as $40 billion to meet requirements of environmental regulations (OGJ, May 25, p. 26).
Higher refinery operating costs also will contribute to the gasoline price spiral.
Small refiners especially are vulnerable to the high cost of manufacturing gasoline with CAAA required oxygenate content. But EIA says small refiners should be able to maintain their competitiveness by serving specialty and niche markets.
In addition, products pipeline revenues will be lost because downstream blending of oxygenates will reduce pipeline throughput of other products, reducing tariff income.
EPA is authorized to delay CAAA winter 1992-93 requirements for as long as 2 years if oxygenate supplies or distribution capacity are insufficient.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
